Tear it up and don't pay. What will happen to the transit of Russian gas through Ukraine?

Ukraine still receives hundreds of millions of dollars for the transit of Russian gas, but Gazprom earns tens of times more. What will happen in 2025?

At the end of 2024, the five-year agreement on the transit of Russian gas through Ukraine will expire. In just two years of the big war, this contract brought more than $10 billion to the budget of the aggressor country.

Why didn’t Ukraine stop pumping blue fuel immediately after February 24, 2022? Officials explain this by the need to fulfill their obligations to European partners.

“Two years ago, Europe was not ready to live without Russian gas; it needed time to reorient itself to other sources of supply. Now the EU countries can definitely do without our transit,” explains the ED’s interlocutor in the government.

However, not everyone agrees with this thesis. Messages have begun to appear in the information space that, under certain conditions, Russian gas will continue to be transported to the EU through the Ukrainian gas transportation system (GTS).

Will transit continue in 2025? How much will Ukraine lose if it stops and what will the future of the gas transportation system be like?

What will Ukraine lose if transit is stopped?

Naftogaz and Gazprom signed a five-year contract for the transit of gas from Russia to the EU countries through Ukraine on December 30, 2019. Its terms provide for guaranteed supplies of 65 billion cubic meters of blue fuel in the first year, and in the next four years - at least 40 billion cubic meters annually.

Over these five years, Ukraine should have been guaranteed to receive more than $7 billion from the Russians. The fact is that the agreement contains the ship-or-pay principle, that is, “transport or pay.” This means that, regardless of the volumes of gas pumped, Moscow must pay Kyiv for the above-mentioned volumes of contracted services. Minimum.

However, transit revenues varied from year to year. It is not known for certain how much Ukraine received in the first four years of the treaty. According to the former director of the GTS Operator, Sergei Makogon, in 2023 this amount was about $800 million, which is less than 0.5% of the country’s GDP.

“This is not a very big number. In addition, not all of the $800 million goes to the state budget. From these funds, the GTS Operator pays the cost of technical gas, employee salaries, and gas pipeline repairs. If the budget reaches $150-200 million, then that’s good,” Makogon explained.

According to him, if the parties decide to extend the contract, then with a high probability the condition on the application of the “transport or pay” principle will not be in the document. That is, Gazprom will pay only for those volumes that were actually pumped, that is, a maximum of 42 million cubic meters per day.

“If the transit tariff does not increase (the current one is $31 per thousand cubic meters - EP), then the income could be a maximum of $450 million,” Makogon added.

Will there be transit? Scenarios

The first conversations about the fate of blue fuel transit through Ukraine appeared at the end of 2023. European Commissioner for Energy Kadri Simson warned that countries in the bloc that consume gas from Russia must begin preparing to stop transit.

A month later, Slovak Prime Minister Robert Fico, after a meeting with his Ukrainian counterpart Denis Shmygal, said: “An agreement has emerged that the transit of Russian gas through Ukraine will probably continue.”

The Ukrainian government denied these words. “The transit contract ends at the end of 2024. We are not going to talk to the Russians and extend the contract,” the press service of the Cabinet of Ministers said. How is it really?

“I think there will be no extension of the agreement or a new contract with Gazprom. If the European Commission insists, then a completely different scheme may be introduced,” explains Mikhail Gonchar, president of the Strategy XXI Center for Global Studies.

Reference

Before the big war, Gazprom annually supplied 150-155 billion cubic meters of blue fuel to the European Union. At that time, this was about 40% of the bloc's total gas imports. In total, five gas pipelines go from Russia to the EU through other countries.

Both Nord Streams have now been stopped, and the Yamal-Europe gas pipeline with a capacity of 38 billion cubic meters per year is also blocked. Supplies go through the Turkish Stream and Blue Stream to Turkey and the countries of Southern and South-Eastern Europe, as well as through one of the two entry points into the Ukrainian GTS to the EU countries.

“EU countries buy fuel from Gazprom on our border with Russia through signing a contract, and the GTS Operator signs a contract with European companies and provides them with the service of transporting gas from the eastern border of Ukraine to the western. We have no relationship with Gazprom,” he adds.

Energy expert Gennady Ryabtsev agrees with him. He is confident that the Ukrainian side has a clear position: not to sign any agreements with Gazprom.

“If the EU countries need Russian gas so much, then let them go to Moscow and negotiate, and we, in accordance with the association agreement with the EU, are obliged to ensure this transit. Sign, take all risks.

I don’t think that ours will initiate any agreements with the Russians. This will be a political mistake and will cost Alexey Chernyshev (head of Naftogaz - EP) or any other politician or official their position,” Ryabtsev believes.

“This story will become clearer in the summer, when Europe goes through the winter, looks at how much gas they have left in storage, what they have with LNG terminals, compares the two winters and makes a decision. If transit remains, it will be scanty. This will approximately happen in the second half of the year, and until then this is purely political speculation,” an ED source in the government shares his forecast.

Makogon recalls that a few days after Fico’s visit to Ukraine, the GTS Operator announced its readiness to extend gas transit from Russia after 2024. The company plans to “offer annual intermittent transport capacity on the Russian border” in accordance with Ukrainian and European Union legislation.

“On July 15, GTS Operator will offer uninterrupted transport capacity for the next 15 years in accordance with the wider European auction schedule. The operator will publish the details no later than July 8. It is not yet clear what power it will offer and how much this power will cost,” Makogon said.

In his opinion, continuing transit through Ukraine is more beneficial for Russians.

“Ukraine receives about $800 million a year, and after 2024 it will be able to receive a maximum of $450 million. It is beneficial for us as a country to receive money, but we understand that Gazprom receives tens of times more.

If they continue to transport 15 billion cubic meters of gas per year through Ukraine to the EU and Moldova, they will receive about 6 billion dollars annually. What do we gain from this? - asks the former head of GTS Operator.

What will happen to the GTS if transit is stopped?

Experts and market participants interviewed by ED say that the Ukrainian gas transportation system has long been ready for a complete stop in the transportation of Russian gas.

“There are no problems for the operation of the gas transportation system in the conditions of “zero transit”. The GTS Operator has done everything necessary to reorient all involved pipes to serve Ukrainian consumers. In addition, the pipe can be used as an additional gas storage tank,” says Ryabtsev.

“Nothing bad will happen. We have been preparing the system to work offline since 2009, when the Russians turned off transit. It is necessary to close some compressor stations that have not been used for decades. We have 74 stations, but we need 10-12. There will be no problems,” explains the ex-director of GTS Operator.

At the same time, due to the lack of transit, tariffs for consumers may increase.

“Everyone will pay a little more, but it’s not critical. If now the population pays 8 hryvnia per cubic meter, then it will not pay 16 hryvnia. The price of the service may rise by 50 kopecks or by a hryvnia, but this is still not critical,” says an ED source in one of the state-owned companies.